ECB chief economist suggests price spiral will ease as year ends

The Chief Economist of the European Central Bank (ECB) Irish man Philip Lane has expressed confidence that inflation will “start to come down” towards the end of this year.

Inflation in the Irish economy is expected to surge to 8.5 per cent or even higher in the coming months, a level not seen since the early 1980s, as the war in Ukraine compounds existing price pressures in the global economy.

Earlier this week, the Economic and Social Research Institute (ESRI) warned the cost-of-living squeeze will see incomes – in real terms – fall by an average of 2 per cent this year which will see a typical household’s income fall by about €1,300.

However, the ECB economist and former governor of Ireland’s Central Bank expressed confidence that inflation will “start to come down” towards the end of this year.

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“We think the inflation rate will start to come down in the second half of the year,” he told RTÉ Radio One’s The Business on Saturday morning.

“We tend to focus on the overall inflation rate for the year. We have it at 5.1 per cent for the year. It’s above that number now and it will be above that number for the next few months, but we think it will start to come down.”

Mr Lane said he expected the eurozone rate of inflation to be “a little bit above 2 per cent next year and falling back to 1.9 per cent in 2024”.

He cautioned against expecting prices to fall dramatically and stressed that when he talked of inflation next year being around 2 per cent he was not saying “prices are going to fall but it does mean that this momentum will level off.”

He noted the price of oil on energy markets in mid-November the price of oil was $80 a barrel, but it is now at $120 a barrel.

“With that 50 per cent increase in the price of oil in recent months, we do think that between now and the summer, inflation will continue to climb,” he said.

“The exact design of how you implement measures will vary country by country. From a macro- economic point of view, if someone on a high income has to pay more for their energy, they may just reduce their savings rate.

“For those on a low income, they don’t have savings to fall back on. They will reduce their consumption which hurts the economy. From the economic point of view, targeted and temporary are our key messages,” he said.

He accepted that prices increases are negatively impacting many people but suggested that it would ease next year. “We think inflation will still be a lot higher than it was before the pandemic but an inflation rate of about 2 per cent is very different to an inflation rate of around 4 or 5 percent.”

He warned against making comparisons with the 1970s when spiralling inflation brought the Irish economy to its knees. “For firms and workers trying to make reasonable pay agreements, there has been this surprise inflation, people have seen a loss of their living standards and that does have to be a factor in wage negotiations. But there is a difference between that and saying we think we are in a new high inflation era like the 1970s.”